PFI Test Case Provides Guidance on Limited Partners Liability

PFI Test Case Provides Guidance on Limited Partners Liability

All Litigation

The recent decision in Certain Limited Partners In Henderson PFI Secondary Fund II LLP (A Firm) v (1) Henderson PFI Secondary Fund II LLP (A Firm) and others [2012] EWHC 3259 (Comm) provides guidance on the liability of a Limited Partner (“LP”Â) of an English Limited Partnership.

The case in question involved the LPs of 22 pension schemes and investment funds suing Henderson PFI Secondary Fund II alleging a breach of mandate.


English Limited Partnerships are frequently used as an investment vehicle by fund managers and favoured by investors due to their flexibility, tax efficient structure and the limited liability protection afforded to LP investors.

Limited Partnerships are similar to conventional partnerships however as well as having one or more General Partners (“GPs”Â) responsible for the management of the partnership there are also one or more LPs.

GPs share similar responsibilities and powers as partners in a conventional firm including personal liability for the liabilities of the firm.

LPs responsibilities and powers resemble corporate shareholders in that their liability is limited to their investment and do not normally have any management authority. The GPs pay the LPs a return on their investment in accordance with the partnership agreement.

Grey area

The difficulties with Limited Partnerships lie in the unclear scope of restrictions placed upon an LP’Âs ability to get involved in the management of the partnership.

Section 6(i) of the Limited Partnership Act 1907 states:

“(1)A limited partner shall not take part in the management of the partnership business, and shall not have power to bind the firm:

Provided that a limited partner may by himself or his agent at any time inspect the books of the firm and examine into the state and prospects of the partnership business, and may advise with the partners thereon.

If a limited partner takes part in the management of the partnership business he shall be liable for all debts and obligations of the firm incurred while he so takes part in the management as though he were a general partner.”


It is common practice for GPs to delegate fund management duties to a fund manager, in this case a sister company of the GP, Henderson Equity Partners Limited (“the Fund Manager”).

The LP investors alleged that they were led to believe that they were investing solely in private finance initiative (“PFI”Â) projects.

The Fund Manager instead invested into Laing Plc, a construction and project management company. The PFI fund subsequently fell in value by two thirds during the 2007-2008 economic downturn.

The LPs alleged that the purchase of Laing Plc was in breach of the fund’Âs mandate.

As the GP and Fund Manager were connected and the fact that the GP would not likely sue the Fund Manager the LPs sought to bring a derivative action in the name of the partnership against both the GP and the Fund Manager.

The court had to decide on the construction of the documents and also whether bringing a derivative action would amount to management activity and expose the LPs to the full liabilities of the partnership.

Mr Justice Cooke decided that the GP and Fund Manager had not breached the investment criteria however his judgment also provided insight into and a clearer demarcation of what would amount to management activities and in particular:

1.) The LP’s were entitled to pursue the derivative claim against the Fund Manager however so long as they pursued their claims in the name of the partnership they must forfeit their limited liability status;

2.) The LP’Âs were not entitled to pursue a derivative claim against the GP. They could pursue the GP as individual LPs but not in the name of the partnership. It was held that the limited partnership agreement governed claims by the LPs against the GP and the court would approach such claims as ordinary partnership disputes. Enforcement of these rights would not fall under management of partnership business;

3.) On what activities would constitute management the court affirmed the statements made in Inversiones Frieira SL v Colyzeo Investors I and II LP [2012] Bus LR 1136 which made reference to the qualifying provision in Section 6(i) as stated above in that the LPs can inspect the books, examine and advise the partners. Such activity would not constitute participation or management. An LP that analyses and discusses this information with other LPs does not become involved in the management of the partnership however participation in the decision making process and commenting on operational business decisions taken by the GP will be deemed as involvement in management activities. Conducting litigation was not partnership management;

4.) The court held in favour of the GP and Fund Manager in that they had not breached the investment criteria after having scrutinised the Limited Partnership Agreement and Management Deed.


Although the LPs did not succeed in this instance this decision shows that LPs can bring an action against the Fund Manager and demarcates the point at which an LP will lose its limited liability protection.

Summit Law LLP has experienced Commercial Litigation and Insolvency solicitors. If you have any issues you wish to discuss please contact us on 02074 673980.


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